MPs Will Escape George Osborne’s Pensions Tax Raid

The Chancellor last week lowered the limit on lifetime tax-free pension savings, meaning a punitive rate of tax will be levied on pension pots totalling more than £1.25 million.

Ministers said the cap would affect only the extremely rich, but experts have warned the new lower limit could hit workers who are members of final-salary schemes. Under current parliamentary rules, long-serving MPs can retire with a maximum pension of £43,387, payable from the age of 65.

According to calculations by Hargreaves Lansdown, a financial services company, a male worker in the private sector would have to save £1.44  million to receive a £43,387 pension at current annuity rates. A woman would need to save £1.34 million.

Such private sector pensions would be hit by Mr Osborne’s new tax limit. However, MPs with a similar pension income would not.

The difference arises from the way public sector pensions are valued to see if the cap should be applied.

Many public sector workers’ pensions do not have a distinct pot of cash to pay for them, instead being funded from a general fund.

Accountants say that HM Revenue and Customs calculates the pot value of a public sector pension by multiplying the annual sum by 20. So for tax purposes, the MP’s pot is valued at £867,740, well below the tax cap. Laith Khalaf, of Hargreaves Lansdown, said the figures showed the “historically generous” pensions awarded to MPs.

The discrepancy between the treatment of MPs and private sector workers emerged after The Daily Telegraph launched the Hands Off Our Pensions campaign. It calls on ministers to give private sector workers the same stability and certainty about pension rules they have explicitly promised public sector employees.

Ministers have said that recent changes in public sector pension terms will be the last for 25 years, promising state employees “a settlement for a generation”. By contrast, private sector workers have endured repeated changes in pension rules and tax raids on their retirement funds.

The lowering of the lifetime cap on pension funds has led some experts to warn that the Treasury will be effectively penalising pension managers who succeed in increasing the value of their funds.

The tax cap means that a special tax of 55 per cent will be levied on a pension pot above £1.25 million.

Adrian Walker, head of retirement planning at Skandia, the investment company, said lowering the cap could reduce the incentive for some managers to grow funds. “The lifetime allowance effectively caps good investment performance and penalises those who manage investments well,” he said.

As well as reducing the lifetime allowance on pension contributions, Mr Osborne last week lowered the annual tax-free contribution limit to £40,000. Before the Coalition took office, the yearly limit was £255,000.

Financial advisers to some of Britain’s biggest companies warned that the latest reduction in the cap on pension contributions could lead to the end of final-salary pensions in the private sector.

The National Association of Pension Funds said new taxes on pensions would raise twice as much for the Treasury as changes in the levy on banks to help cover the costs of the financial crisis.

Source: telegraph.co.uk